Why Is Gratuity Included in CTC When It's Only Payable After 5 Years? Seeking Expert Insights

Hi,

I received a question from a prospective employee who collected his offer letter from me today:
"Why is the 'Gratuity' (4.81% of basic) included as part of the CTC if I do not get to enjoy the benefit of this component until I complete 5 continuous years of service with your company and then decide to leave? Why can't it be kept out of CTC?"

I had many answers but was not sure which one to choose, so I thought I could ask a few experts.

Thanks :)

Hi,

This could be done in both ways:

1. Can be part of CTC - in which case, if the employee leaves the organization before 5 years, the amount that was withheld should be paid back to him.

2. Can be out of CTC - in which case, the employee gets nothing if he leaves before five years. But, on completion of 5 years, he has to be paid Gratuity as per statute.

By showing it in CTC, the employee knows that the employer is allocating some portion of his compensation for future benefits. The employee should be smart enough to negotiate on Gross salary and not CTC. Nowadays, even FBT has become part of CTC.

Hi,

It's a good point of contention as to how one can charge the employee for the benefits that would accrue after 5 years of service in today's fast-changing times. Most companies don't have business plans for the next four to five years.

If the organization subscribes to a Gratuity fund handled by National Insurers/LIC, then the above is valid as explained by Hema. If the company conducts Actuarial Valuation of gratuity and EL balance, thereby creating the provision for accrued liability in the books of accounts, then it shouldn't be a part of the CTC.

Cheers,
Rajat

I agree with Hema,

From an HR point of view, we want the employees to stay and also want to comply with the statutory requirements. The way out is to treat Gratuity and other retirals as part of CTC.

Hi,

Going ahead with Hema's information, I think we should add Gratuity as part of CTC, since there is a lot of awareness among the employees. This would help in hiring and then retaining the employees. They will be assured about the sum they earned for the said period.

What's others' opinion??

Regards,
Shalini

"Life is 99% attitude" & "Success = attitude"